New York, February 27, 2020 -- Moody's Investors Service, ("Moody's") downgraded
Contura Energy, Inc.'s ("Contura") Corporate
Family Rating ("CFR") to B3 from B2, senior secured
term loan to Caa1 from B3, and Speculative Grade Liquidity ("SGL")
Rating to SGL-3 from SGL-2. The rating outlook has
been revised to negative from stable.
"Contura Energy is expected to experience significant margin compression
due to lower metallurgical coal prices and burn cash in 2020,"
said Ben Nelson, Moody's Vice President -- Senior Credit
Officer and lead analyst for Contura Energy, Inc.
Downgrades:
..Issuer: Contura Energy, Inc.
.... Probability of Default Rating,
Downgraded to B3-PD from B2-PD
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-3 from SGL-2
.... Corporate Family Rating, Downgraded
to B3 from B2
....Senior Secured Bank Credit Facility,
Downgraded to Caa1 (LGD4) from B3 (LGD4)
Outlook Actions:
..Issuer: Contura Energy, Inc.
....Outlook, Changed To Negative From
Stable
RATING RATIONALE
Moody's expects a very challenging year for the coal industry in
2020. Domestic demand for thermal coal is challenged by a mild
winter season, historically low natural gas prices, and ongoing
reduction of the fleet of coal-fired power plants. A substantive
reduction in export prices has redirected coal back into the weakened
domestic market, further reducing prices in early 2020 following
a weak 2019. Likewise, metallurgical coal fell sharply in
the second half of 2019 and, while the met coal market has evidenced
some stability in early 2020, there is no near-term catalyst
for substantive and sustained price improvement. Business conditions
for the global steel industry remain weak, particularly in Europe
where Contura exports a majority of its metallurgical coal. Management
has been taking action to reduce cash costs from about $82/short
ton in 4Q19 to the $76-81/short ton in 2020. However,
based on export metallurgical coal pricing anticipated near the midpoint
of our range of $110-170 per metric ton (CFR Jingtang) and
incorporating adjustments for the quality and location of the company's
coal, Moody's expects that Contura Energy will generate $125-175
million of management-defined EBITDA in 2020, down meaningfully
from $335 million in 2018 and $264 million for the nine
months ended 30 September 2019, and will consume cash in the current
environment of low prices for the company's grades of metallurgical
coal at ports on the East Coast. Moody's also expects that
the company's thermal coal platform will generate modest losses.
Credit metrics will weaken considerably for the rating, including
adjusted financial leverage above 3.5x (Debt/EBITDA).
Moody's also believes that investor concerns about the coal industry's
ESG profile are intensifying and coal producers will be increasingly challenged
by intensifying access to capital issues in the early 2020s. An
increasing portion of the global investment community is reducing or eliminating
exposure to the coal industry with greater emphasis on moving away from
thermal coal. The aggregate impact on the credit quality of the
coal industry is that debt capital will become more expensive over this
horizon, particularly in the public bond markets, and other
business requirements, such as surety bonds, which together
will lead to much more focus on individual coal producers' ability
to fund their operations and articulate clearly their approach to addressing
environmental, social, and governance considerations --
including reducing net debt in the near-to-medium term.
Contura reported about $600 million of debt and $227 million
of surety bonds to support reclamation-related items at 30 September
2019.
The B3 CFR is principally constrained by the inherent volatility in the
metallurgical coal industry and ongoing secular decline in the thermal
coal industry that make it challenging to operate with a leveraged balance
sheet over the rating horizon. The rating also reflects ongoing
regulatory pressures on the coal mining industry despite improved political
support since late 2016, inherent geologic and operational risks
associated with mining, and environmental and social risks specific
to the coal industry. The rating benefits from moderate operating
diversity, meaningful coal reserves, access to multiple transportation
options, and adequate liquidity. Contura's rating also considers
meaningful legacy liabilities, including some mining-specific
items, such asset retirement obligations related to the impact of
coal mining on the environment, and coal-specific items,
such as black lung liabilities related to negative health impacts on mining
employees.
The negative outlook reflects the expectation for cash consumption in
2020. Moody's could downgrade the rating with expectations
for available liquidity to fall below $225 million or cash to fall
below $100 million. Further deterioration in metallurgical
coal prices or expected realized prices could also have negative rating
implications. Moody's could upgrade the rating with expectations
for adjusted financial leverage to remain below 3.5x (Debt/EBITDA),
free cash flow in excess of $25 million, and good liquidity
to support operations.
The SGL-3 balances more than $300 million of available liquidity
with expectations for cash consumption in 2020 and meaningful sensitivity
to changes in metallurgical coal prices. Moody's expects
that the company will generate negative free cash flow in 2019 --
based on expectations for about $50 million of cash interest and
capital spending in the guided range of $175-$195
million that includes some spending on multiple development projects.
Contura Energy disclosed in an earnings preannouncement that the company
has $213 million of cash and $115 million of availability
under a $225 million asset-based revolving credit facility
at 31 December 2019. The asset-based revolving credit facility
is used for letters of credit ($49 million at 30 September 2019)
and some collateral limitations due to the asset-based nature of
the facility. The revolver has a springing fixed charge coverage
ratio test, which Moody's does not expect will be triggered
in 2020, and the term loan does not have financial maintenance covenants.
Environmental, social, and governance factors are important
factors influencing Contura's credit quality. The company
is exposed to ESG issues typical for a company in the coal mining industry,
including increasing global demand for renewable energy that is detrimental
to demand for thermal coal, especially in the United States and
Western Europe. From an environmental perspective the coal mining
sector is also viewed as: (i) very high risk for air pollution and
carbon regulations; (ii) high risk for soil and water pollution,
land use restrictions, and natural and man-made hazards;
and (iii) moderate risk for water shortages. Social issues include
factors such as community relations, operational track record,
and health and safety issues associated with coal mining, such as
black lung disease. Contura Energy is exposed to both thermal coal
and metallurgical coal, though the company's thermal coal
business does not generate meaningful earnings and cash flows.
Moody's believes that thermal coal carries greater ESG-related
risks than metallurgical coal. Governance-related risks
are higher than average for publicly-traded mining companies,
incorporating an aggressive approach to shareholder returns, including
more than $30 million of share repurchases in the third quarter
of 2019, and recent change in the company's chief executive
officer in 2019.
Following a merger with ANR, Inc. and Alpha Natural Resources
Holdings, Inc. in November 2018, Contura now operates
23 underground mines, 9 surface mines and 12 preparation plants
in the Northern Appalachia and Central Appalachia regions. Contura
produced about 25 million tons of coal in 2018 in Central Appalachia and
Northern Appalachia regions, split about evenly between thermal
coal and metallurgical coal. The company also has 65% stake
in the Dominion Terminal Associates coal export terminal in eastern Virginia.
Contura generated $2.4 billion of revenue for the twelve
months ended 30 September 2019.
The principal methodology used in these ratings was Mining published in
September 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
